Time Warner Cable Expands Internet Usage Pricing

Tom Lowry

March 31, 2009, 2:36 PM EDT

Web users, the meter is running. In a strategy that's likely to rankle consumers but be copied by competitors, Time Warner Cable (TWC) is pressing ahead with a plan to charge Internet customers based on how much Web data they consume. Starting next month, the company will introduce tiered pricing in several markets.

In April, Time Warner Cable will begin collecting information on its customers' Internet use in the Texas cities of Austin and San Antonio and in Rochester, N.Y. Consumption billing will begin in those cities later this summer. In Greensboro, N.C., the billing changes will begin sooner. Spun off from Time Warner (TWX) this month, Time Warner Cable had been testing a plan to meter Internet usage in Beaumont, Tex., since last year.

By charging a premium to the heaviest broadband users, much the same way cell-phone providers collect fees from subscribers who exceed their allotted minutes, Time Warner would upend a longstanding pricing strategy among Internet service providers. Typically, phone and cable companies charge flat fees for unlimited access to the Web. "We need a viable model to be able to support the infrastructure of the broadband business," Time Warner Cable CEO Glenn Britt says in an interview. "We made a mistake early on by not defining our business based on the consumption dimension." Time Warner Cable has 8.4 million broadband customers.

Four Proposed Broadband Tiers

Consumer advocates and Web site owners say tiered Web-use pricing limits customer choice and could stifle innovation by crimping demand for high-bandwidth services such as online video and music. Cable and phone companies say they need flexibility in setting prices for use of large, expensive, heavily used broadband networks.

In the case of Time Warner Cable, customers will be charged from $29.95 to $54.90 a month, based on data consumption and desired connection speed. Customers will be charged $1 for each gigabyte (GB) over their plan's cap. Time Warner Cable offers four cap levels of 5, 10, 20, and 40 GB. A download of a high-definition movie typically eats up about 8 GB. A recent report from Sanford C. Bernstein suggests that a family on the 40 GB plan that streams 7.25 hours of online video a week (a fraction of the 60 hours Americans spend watching TV in a week) could end up spending $200 per month on broadband usage fees. And that's just for video viewing, before factoring in such Internet activities as music downloads and photo sharing. "To put it mildly," says Bernstein analyst Craig Moffett, "the decision to limit data consumption can be expected to have profound implications for [consumer] behavior."

But Time Warner says most people are not using that much data. The company's trial in Beaumont, Tex., lasted several months. Of the 10,000 broadband customers enrolled—about 25% of the company's total for Beaumont—about 14% exceeded their cap and had to pay additional fees that averaged about $19 a month. Time Warner Cable also discovered that the top 25% of users consumed 100 times more data than the bottom 25% of users, suggesting an enormous gap in usage patterns.

Comcast: A Warning, Then No Service

As more and more people download TV shows and movies, particularly those in high-definition, broadband networks are facing enormous strain, providers say. Time Warner Cable has said its strategy is intended to alleviate some of that strain. But critics worry that the pricing will discourage broadband use and impede new online media businesses before they even have a chance to flourish.

AT&T (T) is currently conducting its own broadband pricing trial, also in Beaumont. Comcast (CMCSA), the nation's largest cable operator, has taken a different approach, capping residential bandwidth usage at 250 GB a month. Customers who exceed it get a warning phone call from Comcast. A further problem can get a subscription canceled.

For Time Warner Cable's Britt, instituting broadband pricing is a bold move just as he takes the helm of a newly independent company. Fully spun off from Time Warner, the cable company's shares started trading on Mar. 30. Britt's first big challenge may be to sell the upsides of aggressive broadband pricing to his investors. "It's an intriguing idea if you didn't have such a competitive landscape out there," says Rich Greenfield, an analyst at Pali Research. "There are so many other alternatives for consumers when it comes to broadband."

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